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EU Fiscal Compact To Enter Into Force

by Mary Swire,, Hong Kong

26 December 2012

The European Union's (EU's) controversial new fiscal compact is set to enter into force on January 1, forcing signatories to operate under a balanced budget rule.

The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union was signed in March by the leaders of 25 EU Member States. The deal is legally binding as an international agreement, and its entry into force is conditional on ratification by at least 12 eurozone jurisdictions, a process which has now been completed.

It will only apply to contracting parties whose currency is the euro, unless a State declares its intention to be bound by certain provisions. The States to ratify so far include: Austria, Cyprus, Germany, Denmark, Estonia, Spain, France, Greece, Italy, Ireland, Lithuania, Latvia, Portugal, Romania, Finland and Slovenia. Finland's ratification was the final approval required and was secured late last week.

The Treaty stipulates that national budgets in each of the complying States must be in balance or in surplus under a balanced budget rule. To meet this criterion, the annual structural deficit must not exceed 0.5% of gross domestic product (GDP) at market prices.

Economic performance will need to be in line with the country-specific medium-term budgetary objective as defined in the EU's stability and growth pact. In the event of a deviation from the balanced budget rule, an automatic correction mechanism will be triggered.

The Treaty also contains provisions on the coordination and convergence of Member States' economic policies and on governance of the euro area.

The balanced budget rule must be incorporated into Member States' national legal systems within one year of the Treaty's entry into force, i.e. January 1, 2014.


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